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Microeconomics Midterm 2 Review

# Microeconomics Midterm 2 Review - M icroeconomics M idterm...

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Microeconomics Midterm 2 Review Chapter 15: Monopoly: A market unlike a perfectly competitive firm has somewhat market power. It can raise its price, within limits and without the quantity demand falling to zero. The main way it retain its market power is through barriers to entry-That is other companies cannot enter the market to create competition in that particular industry. Government-Created Monopolies are such example of such market(s). Price X Quantity=Total Revenue. Where: R1= 0 (Quantity 1) *150 (Demand Price 1) = 0 R2 =10 (Quantity2) *120 (Demand Price 2) = 1200 R3= 20 (Quantity 3) *90 (Demand Price 3) = 1800 R4= 25 (Quantity 4) *75 (Demand Price 4) = 1,875 R5 =30 (Quantity 5) *60 (Demand Price 5) = 1,800

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R6 =40 (Quantity 6) *30 (Demand Price 6) = 1200 R7 =50 (Quantity 7) *0 (Demand Price 7) = 0 How to calculate Marginal Revenue of Monopolies: - TR/ Q = Marginal Revenue. In the case of 10 th Unit where the firm produces 9, 10, 19, and 20 units: We take [9(quantity) * 123 (Price demanded)] – [10(quantity) * 120 (price demanded)] 1,107 - 1200= -93/1 93 Marginal Revenue. Thus same can be done with: 20 th Quantity: 19x93=1767 & 20x90= 1800 1767-1800 = 33 33/1 33 = Marginal Revenue Thus we can prove the above data with a graph and instead of 93 the marginal revenue is shown 90 and instead of 33 it is shown 30 because of the fact that these values are rounded to nearest 10 th . The Components of Monopoly Marginal Revenue:
The production was as 120 units originally, than it was increased to 240 units. And the price was originally set for 70,000\$ for 120 units and then decreased to 60,000\$ for 240 Units. It had a disadvantage: losing 10,000 from the customers who are willing to pay 70,000. And the advantage of gaining more customers who are willing to pay 60,000. In general though the revenue is greater since more units are sold than before. Profit Maximization and Loss Minimization: - Remember the fact when the ATC (Average Total Cost Curve) is below the demand curve we know that it is an Economic Profit. And we know that when the ATC (Average Total Cost Curve) is above the demand curve there is an

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Economic Loss. The simple equation to determine the Profit or loss is as following: Profit= (Price (above the quantity where marginal cost hits marginal revenue) -Average Total Curve) (above the quantity where marginal cost hits marginal revenue) x Quantity (where Marginal cost hits marginal Revenue). In simple words P = (Price – ATC) x Quantity. The Prophet Bar Bottom line follows the either the line of ATC or Demand depending on Loss or profit. In this case there was an economic loss therefore the owner sets the price a dollar higher for the hope of break even. The quantity demanded is then reduced to 800. Where the demand line hits the above line of the Loss Box. Know all the equations: Total Revenue=P x Q Total Cost: Vc+Fc Profit: Total Revenue-Total Cost

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Monopoly Outcome vs. Perfect Competition Outcome: Demand is the demand curve and supply (where Supply=MC)

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Know that above the equilibrium line it is consumer surplus, and below the equlibrium is producer surplus. The total area is the total surplus.
Surplus in a Monopoly: look at point where marginal curve hits the Marginal Revenue Line.

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Microeconomics Midterm 2 Review - M icroeconomics M idterm...

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